Long-Dated Treasury Yields Rise, But Still Not By Much

By Michael Aneiro

Long-dated Treasuries are weaker for a second straight day, lifting the 30-year yield to 3.429%, per Tradeweb data. But it’s nothing like the sort of long-term rise that pretty much everybody expected coming into this year – many analysts thought that by now the 10-year Treasury yield could be where the 30-year yield currently is. Bond-market observers have been chalking up the recent unexpected strength of bonds – long bonds in particular – to a whole host of reasons, and here’s some of the latest commentary on the topic from JP Morgan rates strategist Alex Roever:

We remain bearish still, as the fundamental and technical drivers remain in place. However, the persistently low level of long-term Treasury yields in the face of generally improving economic conditions has recently caused us to do some soul searching. As part of this, we have evaluated various factors that might be keeping a lid on long-term interest rates. We considered the effects of the current shortage of duration supply in the market, the likely level of the end-of-cycle Fed funds rate and corresponding long-term interest rates, a potential increase in pension fund demand for long-duration bonds, and possible future variations in the size the Fed’s balance sheet…. [W]e we conclude that expectations about the terminal policy rate are probably exerting the greatest pressure currently, although the market may be overestimating the effect….

Taken together, a large part of the [yield curve] flattening observed in recent months appears to be driven by expectations of a lower neutral Fed funds rate and declining duration supply. Moreover, speculative exposure to a flatter curve has increased substantially over the past month and is at decade highs. While positions are stretched, and the curve appears too flat, it will require an unwind of these positions and evidence of a sustained rise in inflation to quickly drive long-end yields higher and the curve steeper from current levels.

The iShares 20+ Year Treasury Bond (TLT) ETF is currently up 18 cents on the day at $111.78, and it’s up 2.6% over the past month.